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In this chapter, you learnt about purchasing power parity and the Law of One Price. This...

In this chapter, you learnt about purchasing power parity and the Law of One Price. This is a theoretical concept that says that the same good should sell for the same price anywhere in the world, and exchange rates will ensure that this is the case. For example, if a TV costs $1,000 in the US and $1200 in Canada, the US/CAN exchange rate should be $1,000/$1,200 = 0.83 US/CAN. Can you think of an example and the reason why this might not hold for a good or service?

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Answer #1

Answer - Let is take example of iphone 11 , 128 GB varient

Currently It sells for $ 749 in US.

The current exchange rate for 1 US dollar in India is 1 $ = 73.71 ₹ .

As per this exchange rate , i phone 11 in India should be price at (73.71*749) = ₹ 55208.79.

But in reality , it is priced in India at ₹ 69900.

Hence here the PPP rate is not holding true.

This is because of the shipping cost incurred from US to India and other complaince cost. Also iphone is being manufactured in US , hence it will be cheaper there. The transportation costs , costs by middlemen etc all combine to make iphone much more expensive than PPP rate in India.

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